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Interest Rate report Assignment

Interest rates can be used to determine the amount of money demanded. The more money demanded for transactions contributing to the nominal GDP the larger the money value. Higher interest rates can be associated with lower volumes of money demanded for transactional use, as the cost of obtaining said cash becomes more expensive. Big Drive Auto may determine that interest rates are too high to borrow, and put off transactions requiring borrowing such as expansion. If interest rates are lower, they may have an increased demand for borrowing activities. In general, the lower the interest rate the more money will be demanded at that rate.

Cost of Operations

Interest rates paid and earned affect the cost of operating expenses. In a business the goal is to keep operating costs low to increase the revenues and profits generated from the sale of vehicles or products sold. The higher the interest rate paid on a loan, the higher the operating costs will prove to be. If costs are declining having liquid cash available may help the business to purchase products and materials at a lower cost. If interest rates are high then having too much liquid cash available could be costly and the business will likely invest its assets, and discourage borrowing activities. When interest rates go down businesses and consumers have a lower cost of capital and can increase spending and capital improvements.

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Yield Curve

The yield curve or term structure of interest rates is the relationship between the cost of borrowing money and the length of time it is being borrowed. For example, Big Drive Auto may have to pay 6% interest a year to borrow money for a 10 year period of time, but only 5% interest if they borrowed the same amount for a 5 year period of time. In this case the yield curve would have points at 5 years at 5% and 10 years at 6%.Yield curves usually have and upward sloping curve as time increases so due rates, to compensate for the risks involved with longer loan periods. This must be considered as borrowing activity takes place to try and limit the time period a loan is taken from in order to minimize interest rates paid to fund expansions, and development.

Changes in Demand

Interest rates also changes consumer demand. Just as businesses want to keep as much of their money as possible, so do consumers. If interest rates increase they may want to hold more of their liquid assets to meet their transactional and asset needs. As interest rates increase on their assets so too do they on borrowing, or credit. If the interest rates on loans increase then consumers may have less credit available to make purchases. As credit markets become tighter and credit is harder to obtain consumer spending may decrease lowering the consumer demand for the products.

Monetary Variables

While interest rates play a large role, more is needed to construct a business plan and for operations. A business plan needs to allow for changes in the economic environments such as inflation, unemployment, available credit and other aspects dictated by monetary policy and the supply of money. As prices go up due to inflation from say suppliers, Big Drive Auto needs to be able to responds, and hopefully anticipate the changes in order to stabilize their operating costs.

Unemployment greatly affects not just the person who is now unemployed but also all those they did business with, this changes the supply of labor and demand for products. Credit also impacts Big Drives Autos ability to sell products. If interest rates are high and or credit is hard to obtain and pay back then consumers are less likely to make discretionary purchases like a new car, however you may see and increase in car maintenance products reflective in Big Drive Autos sales.

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Interest Rate report. (2017, Dec 23). Retrieved from https://primetimeessay.com/interest-rate-report/

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